Monday, May 19, 2014

Piketty: A Gobal Tax on Capital

What is needed to stop the vice of spiraling "supermanager" compensation is an income tax rate of 80% on incomes over $500,000 to $1 million, according to Thomas Piketty in Capital in the Twenty-First Century.  Now it's time to let the other shoe drop and consider the advantage of a global tax on capital, both to raise revenue and also prevent the uncontrolled spiral of wealth inequality that Piketty has developed in previous chapters.

But how would it work?  Obviously it would require a "very high degree and no doubt unrealistic level of international cooperation."  But it would avoid dangerous capital controls and protectionism.  A global tax on capital is "an ideal form of regulation... preserving economic openness... and justly distributing the benefits among and within nations."  And all it requires is some sort of international cooperation similar to the present "automatic sharing of banking information".

The global tax on capital would be a tax on net assets, the "market value of all financial assets... and non-financial assets" like real estate.  It could be zero below 1 million euros, 1% below 5 million, and 2 percent above 5 million.  It could be made more progressive, of course, with a rate of 5-10% tax on fortunes above 1 billion euros.  The tax would differ from current "property" taxes which are taxed at a flat rate on gross value without taking debt into account.

The revenue would not be that much, 3-4% of national income, for its primary job is not to raise money but to regulate capitalism.  Its first goal is to "stop the indefinite increase of inequality of wealth". But it will also "impose effective regulation on the financial and banking system to avoid crises."
To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.
We need to know the "distribution of wealth." National, international and statistical organizations "would at last be able to produce reliable data about the evolution of global wealth." Needless to say, "truly democratic debate cannot proceed without reliable statistics."

The whole thing could start with a 0.1% tax on capital that amounted to a "compulsory reporting law".  People would need to make the report to be "recognized as the legal owner" of their assets as after the French Revolution.  It's all quite simple: "national tax authorities should receive all the information they need to calculate the net wealth of every citizen."  Banks already have to inform tax authorities about bank accounts; all that is needed is an expansion of this system, but it would have to overcome the objections of tax havens.  A model of this is the US Foreign Account Tax Compliance Act (FATCA).  But "automatic sanctions not only on banks but also on countries" would be needed to get universal compliance.

Once the 0.1% tax reporting law is in place, what next?  What is the point of a progressive tax on capital?  There are two: contributory and incentive.  Many wealthy people -- for instance the L'OrĂ©al heiress -- declare income that is 1% or less of their wealth.  Taxing their capital gets to tax their real ability to contribute.  Other wealthy people are content to park their wealth in investments making at most 2-3% a year. A capital tax would force the idle rich to sell assets to more dynamic investors.  There is a caveat: a capital tax would fall heaviest on individuals and corporations experiencing losses.  Thus the tax system should balance an incentive logic (taxing capital) and an insurance logic (taxing realized income from capital).

A capital tax cannot be levied at a high rate, like the once-a-generation estate tax or the French tax on capital in 1945. But a tax in Europe maxing out at 2% per year for fortunes over 5 million euros would affect about 2.5% of people and collect about 2 percent of GDP: not enough to finance the social state, but significant.  But there must be no escape, else countries will not be able to establish a tax that raises serious money.  And only after the tax is established will it be possible to talk about higher rates on the largest fortunes.

How has capital been taxed down the ages?  The Greek philosophers "were in two minds about interest" but laws against usury usually created problems.  The church never had a problem with land rent, from which the church benefited.  It was worried about infinite accumulation, and "commercial and financial adventures" tempting people from the true faith.  With Marx and abolition of private ownership of the means of production the private rate of return on capital could be reduced to zero and was reduced to zero in the Soviet Union.  No more r > g as capital was eliminated and growth was everything.
Unfortunately... private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play a useful role in coordinating the actions of millions of individuals.
In other words, without that "useful role" you find that under socialism r is zero and so is g. Piketty's tax on capital would avoid the disaster of Marxist communism while asserting control over capitalism in the name of the general interest.  The idea of a tax on wealth is nothing new; the only innovation is the progressive idea, child of the 20th century.

Is there no other way to control capitalism, such as by capital controls and protectionism?  No.  Protectionism does not deliver prosperity and does not reverse the inequality spiral.  Capital controls are another thing, since many countries need to insulate themselves from financial crisis.  China has a peculiar system, with a non-convertible currency and strict controls on incoming and outgoing capital.  Chinese billionaires cannot take their money and move to Switzerland. Its capital controls "are one way of regulating and containing the dynamics of wealth inequality."

The question of "petroleum rents" is a special problem of capitalism and inequalities.  Ideally there would be a global tax to redistribute these rents "in an equitable manner."  Since there isn't, we get redistribution in less peaceful ways, such as Middle East wars.  And we get Saudi Arabia with trillions and Egypt next door spending a mere $5 billion a year on education in a nation of 85 million people.

Of course, one way to achieve redistribution is through immigration.  The US is less unequal than Europe because it has redistributed its wealth to successive waves of immigration.  But with all the immigration in the world, the problem of inequality remains.
Redistribution through immigration postpones the problem but does not dispense with the need for a new type of regulation: a social state with progressive taxes on income and capital.
Piketty imagines that the "less advantaged members of the wealthier nations" will accede to immigration if there are institutions in place "to insure that the benefits of globalization are shared by everyone."


In developing his idea for a global tax on capital, Thomas Piketty proposes without irony a vast new apparatus of penetration into the lives of every person on the planet.  It's necessary to peer into every life, he says, to provide proper transparency and democratic oversight of the rich.  And of course, once you have convinced yourself that inequality is the problem, that wealth accumulation without limit is already in progress, and that capitalists are sneaking away into tax havens to hide from their democratic responsibilities, then a global program of reporting and control only makes sense.

There is a counter view.  It was developed in Seeing Like a State by James C. Scott.  A state always wants to know more about its people, to make them "legible." Once the people are legible then you can tax them, control them, and conscript them into your wars.  Every state, everywhere wants to do this, and it usually does.  It seldom lacks for bribed apologists to write books making its program of power the very height of reason and justice.  And that is exactly what Thomas Piketty does, for the modern ruling class, without any sense of shame or irony.

But suppose he is wrong.  Suppose that his r > g is rubbish.  Suppose that fortunes don't increase without limit, but instead rise and fall like the tides.  Suppose that the capitalists, for all their financial power, merely get rich from giving the consumer what she wants, and lose their fortunes as soon as they fail to do so.  Suppose the real problem was politicians and their technical experts building staggeringly inefficient schools and second-class health care and paying their functionaries outrageously high salaries and pensions while letting the poor moulder away in want and ignorance.

If that were true then Piketty and his pals would be the most exploitative and unjust rulers the world has ever seen, and hanging, in the words of Agatha Christie's Captain Hastings, would be too good for them.


Part One: Income and Capital

Income and Output

End of Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration | Two Worlds: France and the US

Inequality of Labor Income | Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century | Rethinking the Progressive Income Tax

A Global Tax on Capital | The Question of the Public Debt

Conclusion: Anti-Piketty


  1. An entire political ideology - nay, an entire ethos - premised on helping the least wealthy people is screwing the same schmucks it purports to help? What WILL the historians say?

    Sam Martinez

  2. You tell it like you see it and I respect the hell out of that. Very thoughtful.